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Lifestyle Creep and the Self-Employed

This article was written by in Career and Work. 56 comments.


Over the next couple of weeks, six finalists will be auditioning for the opening of “staff writer” at Consumerism Commentary. Each will be providing two guest articles to share with readers. After the six writers have shared their guest articles, readers will have an opportunity to provide feedback before we select the staff writer.

This article is presented by VCMcGuire, a regular contributor to the New York Times and other publications.

I ran my freelance writing business out of my dining room until July, when my family moved to a bigger house. Now I run my business out of a dedicated room on the second floor — a room that we have to heat, cool, clean and furnish. Instead of sharing a 5-year-old inkjet printer with the rest of the household, I have an all-in-one printer, scanner and copier. And it’s time to stop scrawling my email address on a piece of scrap paper when I meet potential clients. I need to bite the bullet and order some business cards.

My business is going through what all personal finance junkies dread: Lifestyle creep.

Normally we think of lifestyle creep as something that happens to individuals or families. Investopedia defines lifestyle creep as “a situation where people’s lifestyle or standard of living improves as their discretionary income rises.” When this happens, people often commit to higher fixed expenses, such as bigger house payments, rather than using the extra income to reduce debt or build savings. Paying for an increasingly lavish lifestyle can make us too dependent too quickly on the new, larger salary. This makes it harder to change careers, retire, or weather a period of unemployment.

I’m learning the hard way that small businesses can get caught in the same trap. Moderate success can spur increased spending on the business itself, making it hard to return to the early days of running the business on a shoestring. As problems go, this is a good problem, especially in the middle of a recession. My business is becoming more established, less fly-by-night.

But I don’t want to get stuck in a cycle of spending long hours in my home office, working to pay for the home office. So I’ve been thinking of steps I can take to make sure my business expenses don’t eat up all my income.

1. Be smart about taxes. Now that I have a dedicated work space at home, I can take a home office deduction on my taxes. This means I can deduct a portion of our mortgage interest and utilities. I’ve also changed the way I save for retirement. Now that I’m paying self employment tax, I have a bigger incentive to contribute to my retirement accounts with pre-tax earnings. So I’ve stopped contributing to my Roth IRA, and instead I’m putting away money in a SEP-IRA.

2. Don’t overspend on self promotion. I’ve been thinking it’s time I put together a website to showcase the projects I’ve done and attract new clients. That means buying a domain name and hiring a web designer, and maybe a photographer to take a head shot of me. I already mentioned the business cards. I love the way letterpress printing looks, don’t you?

Wait a second. All this, just to promote a business that I can do part time, at home in my pajamas? If I’m not careful, I could easily spend all my freelance income and then some. There’s got to be a less expensive way to promote my business.

I can think of a lot of successful freelance writers who don’t have websites. Some link to online writing samples in their LinkedIn profiles, some write query letters to editors, and some get work through good old fashioned word-of-mouth. I could put together a simple site on my own without hiring a web designer. I have talented friends–one of them could probably take a perfectly good head shot. And I can buy a box of basic business cards online for less than $20.

3. Stick to a budget. I’m frugal when it comes to household spending, but for some reason it’s easy for me to justify spending money if it’s work-related. If I go to Staples, I usually end up walking out of there with some goodies that weren’t on my list. But they’re for work, so it’s okay, right?

It’s just as important to be frugal when buying office supplies as it is to be frugal at the grocery store. The tax deduction helps take the sting out of business spending, but it’s always better not to spend the money in the first place. Here’s where self knowledge comes in. I’ve learned I’m less likely to impulse buy if I’m in a hurry. If I go to Staples and wander around the store with a cart for 45 minutes, of course I’ll put things in the cart. But if I stop by for printer paper 10 minutes before an appointment, I will probably walk out the door with only printer paper in my hand.

So what’s a reasonable budget? It’s time to look at my records to find out how much I spend, average, on things like office supplies, computer equipment, and phone calls. Then I’ll figure out which expenses are fairly regular, like subscriptions and toner, and which big irregular expenses that can be anticipated, like computer hardware. Once I have that information, I can look for places to cut back.

4. Don’t be afraid to spend money. Sometimes spending money pays off. I was spending several dollars every time I needed to fax something, not including drive time to Kinko’s. Since I spent $125 on a printer with a built-in scanner, I’ve been able to get away with faxing less, because most companies will accept an emailed PDF file rather than a fax. I’m expecting the new equipment to pay for itself within a year, between reduced costs and increased efficiency.

5. Don’t skimp on insurance. Insurance is the bogeyman of the self-employed. It’s expensive, but it’s not smart to go without. I’m more fortunate than many freelancers because I have a part-time day job that gives me access to affordable health insurance. These situations, while hard to find, do exist. Other insurance solutions for the self-employed include joining a professional organization that offers group insurance rates to its members, or buying a high-deductible plan with a Health Savings Account. (You can see other Consumerism Commentary posts about insurance here.)

Believe me, I’m thrilled that I’ve graduated from writing at the dining room table. But now that I’ve got the basic ingredients to run a modest but successful freelance writing business, I need to make sure to keep my costs down and avoid the temptation to ratchet up my business expenses year after year.

Has your small business experienced lifestyle creep? What are your strategies for keeping your overhead low?

This is a guest article by VCMcGuire, one of six finalists interested in being Consumerism Commentary’s staff writer.

Photo credit: Kaspars Butlers

Updated January 16, 2010 and originally published November 12, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

V.C. McGuire is a regular contributor to the New York Times and other publications. Recently, she has written about real estate, insurance, home improvement, and personal finance. She lives in Philadelphia. View all articles by .

{ 22 comments… read them below or add one }

avatar Miranda

I bought business cards for the first time last year. It was a rather heady feeling. And I bought a better computer — one that can handle the workload of a freelance writer. But other than that, I’m keeping costs mostly down.

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avatar Leslie

All great advice; I’m a freelance musician on a shoestring budget, and I’m starting to feel like I should be spending more on work-related ‘necessities’ in order to keep myself competitive. Setting up an attractive website seems to be the trend, but I’ve managed to make a lot of contacts without that, simply through word of mouth. I’m sure it depends on the area of the country and the industry, but I think it is possible for someone self-employed in a creative field to be successful without a huge investment.

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avatar NJ

Home Office deductions include more than a portion of your mortgage and utilities. If you dedicate a sixth of your home space to strict office use, you can deduct a sixth of your cleaning and home maintenance expenses as well. Even the small things, a jar of gum drops or a cup of coffee you serve your client, are also deductible. These do add up.
When you were going back and forth to Kinkos, your mileage was deductible. So is the mileage to pick up that printer paper. If you paint your home office, take off the paint and the mileage to purchase it.
Re-roof or paint your whole house and deduct a sixth of its cost. Add a room onto your house–Oops. That’s going to reduce you home office deductions. So will letting guests sleep on your office sofa, letting the kids stash a box of toys in the office closet or folding your laundry on your desk and making personal phone calls from your office. Do too many of these things and you will be denied a home office deduction all together.
What saves us from life-style creep the most is running everything by our tax professional. I highly recommended that to anyone starting a new business.

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avatar vcmcguire

Thanks for this. I thought I remembered that home maintenance is also deductible.

I still don’t use a tax pro. I do my taxes myself with pencil and paper. I know, I know, I’m a dinosaur. One of these years I should hire an accountant just to make sure I’m not missing anything.

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avatar Rosemary

Good tips! Especially #2.

There are a lot of products marketed to the small business owner, it’s helpful to take stock of what you really need and not be afraid to find creative solutions and barter with other small businesses.

Thanks!

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avatar vcmcguire

Love the barter idea. I bet I could find a photographer to take my picture in exchange for having me write a press release for their latest exhibit, or something like that.

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avatar anonymous

You might be surprised to find out that individual health insurance is actually much cheaper than group health insurance through an employer. In most states you can get a similar plan from the same insurance company even for about half of the cost of a group plan. The main difference is that with a group plan everyone is approved for coverage regardless of health issues (hence the higher rates) while on the individual health insurance side one has to go through medical underwriting before they are approved for coverage.

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avatar Adriene Crimson

This is so helpful! Thank you for sharing your experience & insight Ms McGuire. I hope to see more of your thoughts here.

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avatar Financial Samurai

Hi VC,

Thanks for your tips. Do you mind sharing with me/us your bio? I’m curious to know how you got the opportunity to write for the NY Times, a great paper of course. Also, since you write for the NYT, what spurred you to write for Consumerism Commentary, not that this is a bad site.

I’m always fascinated with success stories in particular fields. I don’t think Flexo bothered to notify those who took the time to apply as guest writers that they didn’t get accepted, which is his perogative I guess.

Your thoughts appreciated!

FS

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avatar vcmcguire

FS, Thanks for your comment. My bio is pretty unconventional. I studied writing in college, but then became a librarian because writing seemed too uncertain. I don’t like not knowing where next week’s grocery money is coming from. But working 9-5 didn’t suit me, so I’ve worked out a crazy patchwork professional life. I work part-time as a librarian for the steady income, benefits, and the satisfaction I get from helping people. With the rest of my time I do freelance writing, and occasionally index books. I got the NYT gig through the usual combination of luck and hard work. I don’t have any magic formulas for you. I will tell you that one of the writing samples that got my foot in the door at NYT was a blog I was writing at the time.

Why write for Consumerism Commentary? How much time do you have? Let’s see. I’ll give you my top 3 reasons.

1. Like many people, I’m looking for work. Two of my long-term projects are winding down by the end of the year. Even though I’m busy right now, under-employment looms if I don’t find some new venues to write for. I decided to look for 2-3 blogs to write for to supplement my other work. I started to put out feelers to find blogging work, and then Flexo advertised for a writer. I’ve been reading this site semi-regularly since 2005, so it was a no-brainer to apply. Whether I become a staff writer here or not, I’m still hoping to find a couple other similar gigs.

2. I want to break into writing for some personal finance and business publications, but I don’t have many writing credits or contacts in those areas. I could just doggedly send out queries til I get a bite, but writing here would give me a chance to get experience, build a portfolio, and meet lots of personal finance geeks.

3. Tomorrow I’m going to start working on another NYT article that will run online in about a month. It will take me hours and hours and hours. I will do international phone interviews, spend tons of time doing research online, write and re-write. The end result will be really slick, thanks to NYT’s team of editors, copy editors, web editors, and photo editors. Tomorrow or the next day, I’m also going to start working on my second guest post for this site. I’ll think of a fun topic that I want to learn about, do some online research and some thinking, and write it up. I’ll probably print it out and edit it by hand to make sure it reads smoothly. Then I’ll send it to Flexo and I’ll be done, the same day I started the project. I love writing for NYT, but can you see how blogging would provide a nice respite from it?

That was a long answer, but I hope I answered your question.

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avatar Financial Samurai

Hi VC!

Thanks so much for sharing your insights! Good writing is truly HARD WORK and I commend you for your work. I work about 50-60 hours a week and also try and come out with 3-4 original articles on my site b/c I feel the personal finance community has too many same old boring things. There’s only so many ways you can say “spend less than you earn” right?

Was your first NYT gig via a blog post they found, or something you submitted to one of their writers or editors? Ahhhhh, to have some of the best editors in the world edit your work and make it pretty would be such a luxury. I would love that.

VC, your answer is great, and I think the all-seeing Flexo will appreciate your openness and thoughts. Succeed or fail, it’s great to see you TRY!

Best,

FS

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avatar vcmcguire

FS,
Wait, are you saying “Spend less than you earn” has already been done? I was totally going to do that for my second guest post. Snap, now I have to think of another topic.

Yeah, 50-60 hours a week is about what I work too. For example, it’s 10:30 PM. What am I still doing online? I’m shutting down after this comment, I swear.

I’ll email you tomorrow so we can talk about writing off the air.

VCM

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avatar Financial Samurai

Sounds great. Looking forward to your e-mail. BTW, I can’t and don’t check my FS e-mail or twitter during the day (7am-6pm PST), so if you do contact, do know i’ll get back to you in the evening!

Best, FS

avatar BW

Thanks for making this great point! I frequently talk myself out of buying personal items I feel are frivolous but somehow when it’s work related it is so easy to justify it as an investment in my business and splurge! But you’re right – we should be examining each business expense as critically as we would our personal ones!

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avatar Senan

You’re livin’ the dream dude, writing in your pyjamas! Seriously though, the one thing I think that does need some money spending on it for a freelancer is the creation of a ‘workspace’; be it in a garage, bedroom corner, whatever.

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avatar Nicole @ RainyDaySaver

Excellent points for freelancers in all industries to consider. Many things to keep in mind if I make the jump to FT freelance work. As a part-time writer/editor, I don’t need too much “stuff” — the computer is about it, but I’ve been toying with the idea of business cards and a website.

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avatar DavidCL

Boy do I ever know what you’re talking about. My small business went through so much lifestyle creep that a number of years ago it moved out of the house and got it’s own place. That didn’t go so well. Now it’s back, hanging it’s head, living in Mom and Dad’s attic.

In retrospect, the two big pieces of lifestyle creep that I should have avoided at all costs were the outside office and the fulltime employee. I had convinced myself these were investments that would pay off, but I hadn’t really done the math.

I’m actually working on rebuilding my business after a few years of not focusing on it much. Avoiding lifestyle creep, this time, is very much on my mind. Thanks for helping me put a name on what I’m trying to do!

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avatar Money Crashers

Hey Ray, thanks for this article. I have a few clients doing internet marketing, so I have decided to take the plunge and start spending some money to make the part-time business look like more of a legitimate business. This is a good reminder to not go overboard.

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avatar Kristen from FiLife

Hi V.C.,

Great post.

In terms of building a website: there are a few low-cost almost no-cost options out there. Personally, I like wordpress. It offers good-looking, easy-to-use *free* templates. You just have to buy domain (~$10 a yr) and web hosting (~ $2 – $10 a month). Intuit just launched some affordable, easy-to-use web building tools too. Of course, time is money…and it takes some time to get either one set-up.

LinkedIn is a great way to promote yourself and maintain a web presence. But I think creating / monitoring a website can really help a writer’s career because it provides real life experience with online publishing tools.

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avatar ANdi @udandi

As I told you on Twitter, this is a great angle to present to the financial blogging community, especially for those running or thinking of starting their own business.

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avatar BW

well VC as I ran through Staples the other day I heard a little voice in my head asking me if I REALLY needed an item for my business? Your article is resonating with me!

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avatar vcmcguire

DCL, that’s quite a cautionary tale.

Kristen, this is a great point. I agree that freelance writers should know the basics of web publishing because it will open things up in terms of what types of assignments we can do. Luckily this is one of the cross-overs from my other life as a librarian–I learned the basics of html in library school, and SEO is really just a new spin on classic information retrieval principles.

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